April 5, 2023/Coronation Economic Note
Over the past quarter, activities across economic sectors deeply integrated with the informal economy have been adversely impacted due to the cash crunch triggered by the Naira redesign policy. Agriculture, which has one of the largest levels of informal employment experienced hiccups with regard to sales of agricultural output to wholesalers, retailers, and end users.
The Naira redesign policy should support efforts around the cashless policy given its mandatory push to electronic transactions. However, there are growing concerns around failed transactions via electronic transfers. Cash remains the preferred means of payment as micro-businesses have very low tolerance for electronic transaction glitches.
The impact of the Naira redesign policy has brought both deflationary and inflationary effects, particularly for food prices, which varied across rural and urban areas. We understand that in remote areas, the cash scarcity led to the sale of farm produce at significantly lower prices. This is reflected in the decline of -4bps for food inflation (21.1% y/y in February ‘23) in the rural consumer price index. Meanwhile, in areas where etransactions are widely adopted, the policy had an inflationary effect. There was an increase of +23bps in food inflation (22.8% y/y in February ‘23) in urban consumer price index.
The extension of old naira notes should bring some respite, but it is a temporary solution which can be sustained if sufficient cash (i.e., redesigned notes) is printed and made accessible to the real economy. Meanwhile, agency banking should be prioritized in the rural economy to support financial inclusion. Furthermore, online payment platforms should strengthen IT infrastructure as this would reduce issues around payment glitches.
The latest national accounts released by the National Bureau of Statistics (NBS) show that agriculture accounted for 26.5% of total GDP in Q4 ’22. On a y/y basis, the sector grew by 2.1% y/y in Q4 ’22 compared with 1.3% y/y recorded in the previous quarter. Within the sector, crop production grew by 2.4% y/y and accounted for 91% of agriculture GDP. Meanwhile, the livestock and fishery segments contracted -1.6% y/y and -3.0% y/y, respectively. Over the past eight quarters, the sector has grown by an average of 2.0%.
Regarding grains, there has been a boost to domestic rice production following the importation ban that the FGN placed on rice in 2019. Industry sources suggest that Nigeria has achieved 75% self-sufficiency in rice production since the ban took effect. Looking at fisheries, data in the public domain show that Nigeria spends USD1.2bn per year on fish imports. This segment will been benefit significantly from private sector led investments.
As for oil palm, the FGN’s self sufficiency target of 2024 seems unattainable. We understand that the annual import bill for oil palm ranges between USD500 – 600m. Domestic production is estimated at 1.3 million metric tons (mmt), resulting in a deficit of 1.2mmt.
Agriculture has been a beneficiary of credit interventions by the CBN. At its March meeting, the CBN/MPC disclosed that total disbursements under the Anchor Borrowers Programme (ABP), amounted to 1.1trn as at end-February ’23, distributed to c.4.6 million smallholder farmers across the country.
The well needed shift towards export-orientation could be achieved quicker using agricultural products. As with most sectors, to boost economic activity, structural deficits such as power shortages still need to be addressed. Furthermore, promoting technology and training farmers will have a lasting effect on the sector.
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